There are a wide variety of reasons to build a home from scratch rather than purchase a prefabricated home, but the process is slightly different than simply applying for a traditional mortgage.

Just as the homeowner will have more options for customization, they will also take on more of the responsibility when it comes to the legal and financial aspect of a new home.

Anyone that is preparing for this process should understand some of the key differences when financing the construction of a new home.

Understanding Your Eligibility

Construction loans are quite unique when compared to financing a home that is already built. Every single lender has varying requirements that could affect if you are eligible or not.

For most lenders, the home that is being built must be on a lot that is already in the process of being purchased and it can only be a single family residence.

Attempting to build an add-on building or a multi-family residence may exclude you from a construction loan. Almost all lenders will require that you go with a licensed and bonded contractor such as Princeton Classic Homes before moving forward with the project.

Types of Loans

Choosing the type of loan that will best suit your needs is one of the more complicated steps in this process.

Not only will homeowners need to decide if they would like a construction-to-permanent loan, they will also need to decide on the loan amount, payment schedules, the length of the loan, and if it is a fixed or adjustable rate loan.

Each of these loan types do come with their own advantages and disadvantages, and this is the time when the services of an experienced mortgage specialist or real estate agent will become invaluable.

A Look at the Application

The loan application will actually be quite similar to that of a pre-made home with a few minor additions.

First, the homeowner will need to collect financial information such as pay stubs and tax data.

They will then need to provide a land contract agreement or deed to the land.

The typical lender will also require a completely finished floor plan as well as material information such as the facade of the home.

Finally, the lender will need the construction agreement with the builder and the finalized cost.

Closing Requirements

The closing requirements will include a down payment if the lot is being purchased. If you already own the land that you will be building on, then you can use the land as equity towards the construction loan.

This is also the time in which you will need to supply proof that you meet all local and state health and safety requirements for that particular piece of land.

Your municipality may require proof of septic tanks being installed or testing of the soil and water.

You may also need to sign contracts with local electric and water companies for running pipes and lines.

Draws and End Loans

Once everything is completed and the financing has been approved, the first loan “draw” will take place.

A draw is the lump sum that the builder is given at regular intervals to continue working on the home.

Initially, the draws will come from the down payment. After that has been exhausted, then the draws will begin to come from the loan itself.

Interest will not begin on the loan until the first draw is taken from it. Once the construction is complete and an occupancy permit has been established, then the construction loan will be rewritten into a permanent home loan.

Construction loans are different than any other form of financing, and this is why potential homeowners need to work with experienced contractors and loan specialists in order to avoid any major issues during the build.